FDIC Resorts to Smoke and Mirrors to Prop Up the Bank Insurance Fund

Posted by Michael A. Kamperman on September 28, 2009

Sheila Beard and the governing board of the FDIC will probably require banks to pre-pay their FDIC deposit insurance premiums for the next 3 years in advance.  The reason is the FDIC has run out of money and there are still many troubled banks that need to be closed.  Closing a bank costs money and the FDIC is required to have the cash available to fund the closing costs.  The FDIC is not technically broke.  Deposit insurance is backed by the federal government and the FDIC has a $500 billion line of credit from the U.S. Treasury that they can tap at anytime.  But the mood in Washington is to do as little as possible for the economy and to kick the can down the road in the hope and prayer that an economic rebound will materialize to solve the economic problems.  The last thing Washington is interested in doing is spending political capital to fix the economy.  Hence, the FDIC is borrowing a page from the Treasury’s stress tests of the banks and prefers using smoke and mirrors to pretend everything is not really so dire as opposed to formulating real concrete solutions to fix the real problems.  The FDIC has at least ruled out the sham scenario of borrowing money from the large banks that it backs to assure us our deposits are safe in those banks.  The reason the FDIC has chosen an advance premium payment over the other options is because the accounting for the advance from the banks will not hurt the earnings of the banks.  Basically, a bank will be allowed to expense over 3 years its premiums even though it is required to pay them up front, hence the smoke and mirrors. 

What is truly troubling about the choice the FDIC is about to make is it confirms that no substantial additional help is coming from the Whitehouse to restore credit and create jobs.  The board of the FDIC should stand up and be counted.  It should tap its line of credit at the Treasury and declare that it will ensure that banks that are too weak to lend will be closed and their deposits will be transferred to institutions that will extend credit to consumers and small businesses.  Of course, that would require fixing most of the large banks that the Treasury has turned into Zombies that keep cutting back on their lending to preserve capital.  It would require creating a true “bad bank” that will absorb the toxic assets and free up the flow of credit once again.  But that would require a lot more money and would use up political capital that is being saved for healthcare reform and then energy reform. 

Accounting gimmickry gave us Enron.  Accounting gimmickry gave us large banks with off-balance sheet SIV’s stuffed with AAA rated no money down, no job, bad credit mortgage-backed securities.  Enough with giving us gimmicks.  President Obama, please get yourself a new economic team that will tell you that you need to make hard choices.  The same type of hard choices your generals are telling you need to make in Afghanistan.  At least the military is laying it out on the line and giving you a clear picture of the truth and the ramifications of your decision.  You need someone on your economic team that will tell you the truth about the suffering of the American people.  You need someone, anyone, that will tell you more time and the stimulus plan will not heal the potentially mortal economic wounds our nation has been struck with.  The last person who wants to see you go down as the re-incarnation of Herbert Hoover is me.  The economic team you have now is giving you the same quality of advice that Hebert Hoover’s economic team gave him.  For starters the FDIC is going to need a lot more money than just 3 years of upfront premiums.